A Balance Sheet Approach to China

February 2024 – Nicholas Borst examines China’s economic outlook and financial stability through the framework of the country’s balance sheets.

The Transparency Problem in China’s Credit Markets

January 2023 – The treatment of creditors and outcomes of corporate restructurings in China’s troubled property sector pose challenges for the country’s fixed income markets.

Emerging Markets Briefing

January 2023 – Seafarer addresses key questions about emerging markets investing and how U.S. investors can integrate the asset class into long-term portfolios.

December 2022 – Nicholas Borst discusses recent volatility affecting Chinese stocks and highlights four underappreciated aspects of investing in China. He also examines these topics in a Letter to Shareholders.

Brazil’s Fintech Revolution

November 2022 – Fintech companies in Brazil are upending the country’s banking system, serving consumers in new ways, and offering millions of Brazilians their first bank accounts.

Can Value Investing Work in Emerging Markets?

March 2022 – Paul Espinosa reviews the evolution of the emerging markets asset class over the past 40 years. He notes that growth remains the dominant strategy employed by investors, leaving fertile ground for value investors to extract returns.

Could Smaller Emerging Markets Hold Value Opportunities?

January 2022 – Daniel Duncan explains why a selective value approach – not a top-down search for growth – may be well suited for finding equity returns in frontier markets.

China’s Bond Markets: Defaults and Idiosyncrasies

September 2021 – Several looming corporate restructurings will show just how committed China’s regulators are to the development and healthy maturation of the country’s bond markets.

How the Value Team Finds “Gems” in Emerging Markets

September 2021 – Paul Espinosa examines four company attributes that guide the Value team’s search for “Gems”: ROE-COE spread, resilience across the company life cycle, global validation, and a valuation consistent with the minimum rate of return.

July 2021 – The rapid development of China’s domestic bond market, now the second largest in the world, represents a significant step in the opening up of the country’s capital markets.

The Future of China within the Emerging Market Asset Class

May 2021 – As China’s economic might is ever more fraught with political and moral dilemmas, Andrew Foster weighs the merits of carving out China as an independent asset class.

Managing Currency Risk in the Emerging Markets

May 2021 – Andrew Foster and Kate Jaquet describe how Seafarer utilizes its proprietary macro currency model to manage currency risks within the construct of a diversified portfolio of foreign securities.

March 2021 – Nicholas Borst, Paul Espinosa, and Andrew Foster explain that when evaluating emerging market companies, state control matters, more so than state ownership. Andrew outlines “exception” cases in which it can make sense to invest alongside a state control party, but explains that he wants to see state control decline over time, as more commercially oriented actors take greater control.

China’s Indebted Residential Property Development Sector

June 2020 – As the Chinese economy faces headwinds on multiple fronts, its residential property sector – rife with opaque financing and cross-currency debt – presents risks to Chinese authorities.

June 2020 – Steph Gan speaks with Andrew Foster about her commentary A Tale of Two Indices, which examines how countries and industries that represent the next leg of the developing world’s emergence are likely to be under-represented in leading emerging market indices.

April 2020 – China’s rise as an investment destination has occurred amidst a significant deterioration in the U.S.-China relationship. Nicholas Borst examines how U.S. investors can navigate the dilemma of investing in China, a market that is too big to ignore but full of new and complicated risks.

April 2020 – Steph Gan examines questions that are fundamental to the emerging market asset class: How are emerging market indices designed, and what are their objectives? In what manners do the benchmarks excel, and what are their limitations?

State-owned Enterprises and Investing in China

November 2019 – State influence over companies in China defies easy categorization and depends on both ownership levels and government policy priorities.

May 2019 – Nicholas Borst speaks with two members of Seafarer’s trading team, Chris Clayton and Alex Lusherovich, about how China’s Stock Connect program is changing the way foreign investors access the A-share market.

December 2018 – Nicholas Borst speaks with Inbok Song about his white paper on China’s campaign to develop advanced technologies. Nicholas describes the government’s desire to move up the economic value chain and reduce dependency on foreign-controlled technology. He also addresses the impact of U.S.-China trade tensions on China’s technology campaign.

December 2018 – Nicholas Borst and Steph Gan examine China’s Belt and Road initiative, the topic of a white paper written by Steph. They discuss China’s motivations behind its ambitious vision for global trade and infrastructure development, as well as the risks of the initiative.

September 2018 – China’s campaign to advance its technological capabilities has the potential to transform many emerging high-tech industries through an unprecedented level of government support and cooperation with the private sector.

February 2018 – China’s Belt and Road initiative is an ambitious vision for global trade, infrastructure development, and diplomacy. China’s effort to elevate its international status draws on inspiration from the ancient Silk Road, but with broader territorial reach and potentially massive economic, political and social implications. The financial scale of this undertaking dwarfs the U.S. Marshall Plan in current dollar terms, but prompts key questions: how will it be funded, and who will pay for it?

December 2016 – Daniel Duncan and Andrew Foster provide an update to their August 2015 video that addressed China’s steps to liberalize how its currency trades against the U.S. dollar. Andrew notes that, just over one year later, China is rolling back some of those liberalizations. He suggests that these policy changes are signs of strained liquidity conditions, and that risks in China’s financial system are consequently elevated.

June 2016 – Kate Jaquet examines corporate bond opportunities in the emerging markets, comparing the credit quality and valuation of emerging market versus U.S. high yield bonds.

January 2016 – Paul Espinosa identifies seven distinct sources of value in emerging markets that may give rise to viable opportunities for long-term, value-oriented investments.

September 3, 2015 – Daniel Duncan and Andrew Foster discuss the factors contributing to pronounced market volatility, including currency weakness in emerging markets and recent shifts in China’s currency policy.

August 11, 2015 – Daniel Duncan and Andrew Foster discuss recent changes to the exchange rate mechanism for the Chinese Renminbi, along with some of the potential consequences for financial markets.

June 26, 2015 – Andrew Foster admits that valuations on individual Chinese stocks are unsustainable and are likely to collapse. However, in his opinion, the overall growth of Chinese stock market capitalization does not constitute an ordinary bubble – the situation is far more complex. Andrew offers some data from history to place the evolution of China’s markets in context. He examines how the re-allocation of Chinese household wealth – away from property, and towards equities – might induce some of the Chinese market’s recent gyrations.

March 2015 – Andrew Foster discusses how currency risk impacts the portfolios of long-term investors in the developing world.

Chinese SOEs and the Way Forward

Fourth Quarter 2014 – With the introduction of the “through train” stock program, China’s A-share market is opening up to the world – and some of the state-owned enterprises that populate that market are responding by changing the way they do business.

On Mexico’s Homes

January 2012 – The news from Mexico’s drug war continues to be grim. However, these horrific headlines obscure the fact that Mexico’s economy has enjoyed a degree of resilience despite the insurgent and criminal activities of the narcotics cartels. Perhaps surprisingly – and in contrast to recent U.S. experience – the local housing market has been a source of strength, benefitting from thoughtful government housing policies that have fostered stability and broadened demand. If Mexico manages to escape its current cycle of violence, the housing market may prove to be an important pillar of future growth.

On the Sharia and Islamic Finance

December 2011 – The practice of banking according to Islamic principles, or “the Sharia” – the moral code and religious law of Islam – is relatively unknown within developed nations. However, in many parts of the developing world, Islamic banking is a burgeoning industry. It deserves closer scrutiny not only because it is bringing new and otherwise un-banked customers into the fold, but also because it serves as an alternative model for finance – and it may manage certain types of risk better than conventional Western models.

On Money and Confidence

November 2011 – At my former firm, the founder once offered a simple but powerful lesson. He asserted that two basic dimensions sum up everything one needs to know about the prospective health of financial markets: money and confidence. What I understood from that conversation was that money was the lifeblood of markets, and confidence was the heart that pumps it.

On Mexico’s Shores

October 2011 – Drug-related violence has devastated the Mexican tourism industry, and the country as a whole. However, Mexico’s economy may yet claim a better future if a nascent trend continues: the “re-shoring” of manufacturing capacity. This commentary explores evidence that Mexico can gain market share in manufacturing industries that shifted to China over the past two decades.

On Teflon and Emerging Market Currencies

October 2011 – Some major market participants have implied that emerging market bonds – including those denominated in foreign currencies – are safe havens from the malaise of the developed world economies. EM currencies may offer desirable diversification or investment characteristics – but ultimately they remain speculative, and should not yet be accorded “safe haven” status.

On Flexibility, and Why the World Needs More of It

September 2011 – It has been a long and trying summer. Like everyone, I have been transfixed by the market’s wrenching descent, along with the political mayhem that has accompanied the decline. Stimulus and sovereign debt have become heated, emotional issues. However, despite prevalent rhetoric that focuses on the indebtedness of nations, I believe our primary challenge is one of growth, and not necessarily one of debt. The world needs to embrace greater flexibility in order to restore growth – and if it does not do so, I fear that equity markets will become range bound, and a sustainable recovery will prove elusive.

On Brazilian Investment

July 2011 – In my last commentary, I suggested that Brazil’s long-term record of investment was not particularly impressive. Happily, there is a good deal of evidence that the situation is changing for the better, led by an impressive flow of foreign investment into the country. However, this change could not come too soon: Brazil must execute such investment in order to avoid the “boom-and-bust” cycles that have characterized its past.

On the Importance of Sustained Capital Investment, Part 2

June 2011 – As discussed last week, I hold a belief formed from experience: when investing in developing countries, it’s important to focus where there is careful but sustained investment in fixed capital. This commentary presents basic evidence from the “BRIICS” (Brazil, Russia, India, Indonesia, China, South Africa) in support of that assertion. I examine the implications of those countries’ long-term investment patterns, and I conclude with a brief discussion of China’s aggressive (some would say breakneck) history of investment.

On the Importance of Sustained Capital Investment, Part 1

June 2011 – When I reflect on my investment career, a few experiences stand apart from the rest. One occurred during a trip to India in 2003. During a meeting with a company there, I learned the importance of steady capital investment to sustain long-term growth. A company may appear well-run and profitable, but if it fails to invest in a consistent fashion, it is unlikely to offer the sort of scalable, sustained growth that characterizes a core holding.

On the Uses and Abuses of Discount Rates

June 2011 – When investors search the world for opportunity, do they value a dollar of profit from Indonesia six times more than a dollar from South Korea? I doubt they do. Yet large and misleading discrepancies can arise when investors rely heavily on discount rates in valuation models to determine the relative attractiveness of foreign assets. Discount rates are useful when determining the intrinsic value of a single asset, but in my opinion, they should not be a primary determinant in the allocation between multiple assets.

On China’s Provincial Finances, and the Prospect of Their Reform

June 2011 – Recent reports from China suggest that the central government may clean up bad debts at domestic banks totaling over $450 billion. Those debts are primarily tied to provincial and local governments that borrowed heavily over the past two years. Despite the staggering losses, I am optimistic: China may be embarking on a new and important set of reforms.

On Stockpiling and the Commodity Cycle

May 2011 – Commodity prices have surged dramatically over the past year: one broad index produced by The Economist suggests that prices have risen over 40% in dollar terms. There are a number of well-known explanations for such gains; however, I wonder whether stockpiling by companies in developing countries has exacerbated the trend.

On Double-Invoicing and the Yuan, Part 2

May 2011 – Persistent discrepancies in China’s trade data suggest hidden capital flows into and out of the country. Double-invoicing reveals how little we really know about the yuan. We can take nothing about the yuan for granted—so approach it with caution.

On Double-Invoicing and the Yuan, Part 1

May 2011 – Among global investors, it’s widely held that the Chinese yuan is a “cheap” currency, and that it is undervalued relative to the U.S. dollar. I am inclined to agree over the long-term, but I think the near-term is far more ambiguous. Empirical analysis of a little-known practice called “double-invoicing” sheds light on what some market participants think about the yuan, and it should give investors pause.

On Corporate Hedging

May 2011 – Finance textbooks state company managers “are paid to take risks, but not any risks.” Managers are supposed to hedge away those risks that could jeopardize their firms’ success—like rising input prices. This seems reasonable enough in theory. I don’t buy it in practice.

On Persistent Inflation

April 2011 – During the fall of 2009, I argued that central banks in Asia were no longer taking their cues from the U.S. Federal Reserve, and that this would stoke inflationary pressures. I was right on that count, but did not anticipate the extent to which the Fed itself would contribute to the problem. What’s next? I believe elevated inflation is here to stay—get used to it.

On Fables, Ratings and Guarantees

April 2011 – When you were young, which fable did you prefer: the farce behind the emperor’s new robes, or the comeuppance of the idle grasshopper? Though only fables, the stories hold relevance for the U.S. and Chinese bond markets, respectively.

On the Brazilian Real

April 2011 – While in São Paulo, my main impression was that of the steep valuation of the local currency. It is understandably strong, but does it rest on a strong foundation?

On Starting Out

April 2011 – Judging from the headlines, it would seem an inauspicious time to start a company. I beg to differ.